Estimation of Allocative Inefficiency and Productivity Growth with Dynamic Adjustment Costs
AbstractA substantial literature has been generated on the estimation of allocative and technical inefficiency using static production, cost, profit, and distance functions. We develop a dynamic shadow distance system that integrates dynamic adjustment costs into a long-run shadow cost-minimization problem, which allows us to distinguish static allocative distortions from short-run inefficiencies that arise due to period-to-period adjustment costs. The set of estimating equations is comprised of the first-order conditions from the short-run shadow cost-minimization problem for the variable shadow input quantities, a set of Euler equations derived from subsequent shadow cost minimization with respect to the quasi-fixed inputs, and the input distance function, expressed in terms of shadow quantities. This system nests within it the static model with zero adjustment costs. Using panel data on U.S. electric utilities, we contrast the results of static and dynamic shadow distance systems. First, the zero-adjustment-cost restriction is strongly rejected. Second, we find that adjustment costs represent about 0.42% of total cost, and about 1.26% of capital costs. Third, while both models reveal that labor is not utilized efficiently, the dynamic model indicates a longer period of over-use and less variance over time in the degree of inefficiency. With the dynamic model, productivity growth is larger but more stable.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Econometric Reviews.
Volume (Year): 30 (2011)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.tandfonline.com/LECR20
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.